Quatro Co. issues bonds dated January 1, 2015, with a par value of $400,000. The bonds€™ annual contract rate is 13%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $409,850.

1. What is the amount of the premium on these bonds at issuance?

2. How much total bond interest expense will be recognized over the life of these bonds?

3. Prepare an amortization table like the one in Exhibit for these bonds; use the effective interest method to amortize the premium.

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Bonds: $100,000 Par Value, Semiannual Interest Payments, Two-Year Life, 6% Semiannual Contract Rate, 5% Semiannual Market Rate Cash Semiannual Interest Period-End Bond Interest Interest Premium Unamortized Carrying Paid Expense Amortization Premium Value 6 6% x $100,000 8% x Prior囘 (AJ- B) Prior (D) (C $100,000+ID) 7(0) 12/31/2015 8 (1) 6/30/2016 $6,000S5,177 9 (2) 12/31/2016 10 (36/30/2017 11 (4) 12/31/2017 12 S 823 864 907 952 $3,546 $3,546 $103,546 102,723 101,859 100,952 0 100,o00 2,723 1,859 952 5,136 5,093 5,048 $24,000 $20,454 6,000 6,000 6,000 Column (A) is the par value ($100,000) multiplied by the semiannual contract rate (6%). Column (B) is the prior period's carrying value multiplied by the semiannual market rate 5%). Column (C) is the difference between interest paid and bond interest expense, or [(A)-(B)]. Column (D) is the prior period's unamortized premium less the current period's premium amortization. Column (E) is the par value plus unamortized premium, or [$100,000(D value after deducting the amortized premium, in column С from the prior period's carrying value. Column D shows the premium's reduction by periodic amortization. When the issuer makes the first semiannual interest payment, the effect of premium amortization on bond interest expense and bond liability is recorded as follows: 2016 June 30 L->Bond Interest Expense 5,177 823 Premium on Bonds Payable . Cash. To record semiannual interest and premium amortization (effective interest method). 6,000